25 October 2008

Of course, critics of the Prime Minister are likely to ask why these sage words were not remembered when booming stock markets in India and the world created the impression that the real economy was firmly on the ascendant and that deregulation and reform was all that was needed to generate growth...

Beijing: Quoting a celebrated passage from John Maynard Keynes’ The General Theory of Employment, Interest and Money, Prime Minister Manmohan Singh said on Friday that any international agenda to reform the international financial system would have to take on board the “economically damaging role of excessive speculative activity.”

Dr. Singh’s remarks came on a day that saw President Nicolas Sarkozy of France question the role of international credit agencies and appeal to Asia to stand firmly with Europe in pushing for fundamental reforms in the international financial system when the G-20 countries meet in Washington next month.

Speaking to a closed session of the Asia Europe Meeting summit over dinner here, Dr. Singh reminded the leaders of 44 key Asian and European nations of Keynes’ dictum that speculators did no harm as bubbles on a steady stream of enterprise. “But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.”

Critics of the Prime Minister are likely to ask why these sage words were not remembered when booming stock markets in India and the world created the impression that the real economy was firmly on the ascendant and that deregulation and reform was all that was needed to generate growth. And as the Sensex plunged 11 per cent in one day, Dr. Singh’s government is already coming under pressure to bail out the same speculators by committing public financial institutions to a rescue package aimed at shoring up equity values even at the cost of their own balance sheets.

But with several European leaders looking to Asia and to China, India and Japan in particular to show a way out of the current economic free-fall, the Prime Minister presented the most detailed analysis of the crisis he has offered to date, including a number of proposals that senior officials said were aimed at striking a balance between the ‘business as usual’ approach of the United States and the call for a radical overhaul of the Bretton Woods system that many European leaders have begun talking about.

Blaming the international financial crisis on the failure of regulation and supervision in major developed countries, risk management in private financial institutions and the market discipline mechanism, Dr. Singh said “the sad truth is that in this age of globalisation we have a global economy of sorts but it is not supported by a global polity to provide effective governance.”

The immediate task facing the world was the declogging of credit markets the world over. This, in turn, required coordinated global action to restore confidence in these markets.

In terms of concrete proposals, the Prime Minister said the International Monetary Fund and World Bank had to provide assistance to vulnerable countries “with less service conditionalities and greater flexibility.”

Among his other proposals were: countries with strong foreign exchange positions could make additional resources available to the international financial institutions; as a counter-cyclical device, increased infrastructure investments in developing countries, if backed by increased resources flows from multilateral financial institutions, can act as a powerful stabilizer; the IMF should consider creating liquidity through a fresh allocation of Special Drawing Rights (SDRs) in favour of multilateral development finance institutions

With France advocating a more dramatic restructuring and China, Japan, Korea and the Asean countries proposing expanding their Chiang Mai initiative into a $80 billion regional stabilisation fund, these Indian proposals seem firmly anchored in the Bretton Woods system.

At the same time, Dr. Singh said the world must objectively analyse why the failures which led to the financial crisis have occurred with such ferocity. “This is necessary to put in place a new set of rules which will prevent recurrence of such failures.”

Though he expressed confidence in the ability of the Indian economy to grow at 7 to 7.5 per cent this year, Dr. Singh said the country “cannot remain totally unaffected when the global economy and financial system are in deep trouble.” Noting that the stock market and rupee were under pressure due to capital outflows caused by panicky foreign institutional investors, he warned, “Sooner or later, the real economy is bound to experience the pain.”

In his speech, to the ASEM summit, President Hu Jintao of China called for policy coordination and strengthened cooperation so that the international community could come up with a “common response” to a crisis which had caused “shockwaves” throughout the world.

Like India, China has also not yet conveyed its acceptance of U.S. President George W. Bush’s invitation to attend a G-20 summit to discuss the international financial crisis in Washington next month. Though Beijing has adopted domestic measures and has joined hands with Asian partners to examine ways of restoring confidence and stability to regional markets, it is wary of being asked to use its resources to bail out a system that is in crisis because of regulatory failures in the U.S.

Most European leaders who spoke on Friday spoke of Asia as an outpost of relative stability in real economic terms and warned against protectionism as a response to the hard times which seem around the corner.

6 comments:

Anonymous
said...

I am delighted to see Prime Minister Singh provide leadership internationally on the kind of international economic order that needs to be created coming out of the present crisis. It was important that, as well as his attack on the casino culture, the ASEM leaders recognised the dangers that protectionism and economic nationalism create. PM Singh is truly bringing to bear on the present crisis some of the wisdom of Keynes (well understood from the book by Donald Markwell on "John Maynard Keynes and International Relations: Economic Paths to War and Peace", Oxford, 2006). Congratulaitons, PM Singh - and I hope that world leaders take note of his excellent leadership on internaitonal economic issues.

Walk the Talk, Mr. Manmohan. Your finance minister and you yourself have been so reckless in singing the tunes of de-regulation on behalf of IMF that we PMO-UPA-Government watchers are only skeptical about your new found beliefs on Keynesianism.

As the first step of honouring your own words now, tear up the Raghuram Rajan and Percy Mistry reports. And ask your finance minister to eat up his idiocy that "financial reforms will continue". And stop the crap about privatizing pensions and FDI in Insurance, all of which were the legacies of your flawed financial policies.

True statesmanship lies not in crying wolf after the horse has bolted (to mix metaphors a little). Dr. Manmohan Singh was not only PM and FM, he was also RBI Governor and India's representative Director at the IMF. If speculators had too long a free ride, and if regulators including IMF looked the other way, he should surely have spoken up earlier. I remember well - in many a report in The Hindu, he had been quoted as calling for full convertibility of the Rupee on the capital account, when people like Stiglitz were arguing against it. It has not happened yet, but if it had, surely India would have had a worse time of it in dealing with the crisis. At the very least, what this crisis should do is make a solid case against premature introduction of capital account convertibility.